Things Looking Up: Time to Invest?

The investment climate is much more optimistic now than it was a month ago. Major stock indices are riding a five-week rally and looking to extend the gains this week.

Technically, investor sentiment has been improving over the last few weeks. At this point, about 27% of all U.S. stocks are above the 200-day moving average, up from 22% a week earlier and from 9.16% a month ago. The same goes for the shorter-term moving averages. For the rally to be sustainable, we need to see the moving average continuing to trend higher

Let's take a look at the CRB Spot Index, a measure of 22 commodities. This barometer of economic activity and demand appears to have bottomed at 200 and is currently attempting to break 230. Yet, you need to watch this, since there may be a bearish double top in the works. The CRB is indicating that the economy may be setting up for a turnaround, as the basket of key commodities is showing some signs of turning up. The peak for the CRB was June 1, 2008, when the index traded at 467.60 prior to the subsequent slide. The low was at the 180 level in late 2001.

On the earnings front, there is some leadership from technology and the banks. Wells Fargo & Company (NYSE/WFC) reported strong profits last week, and investment bank The Goldman Sachs Group, Inc. (NYSE/GS) also released good results. Banking stocks are surging, yet I'm hesitant about chasing the gains in banks, as there are still issues on the balance sheets. The best way to trade banking stocks is to buy on dips. In an interview on Yahoo's Tech Ticker, investment guru George Soros said that there would continue to be problems in the banking sector and that the current rally will fail.

Another good sign for the economy is better-than-expected results from bellwether Johnson & Johnson (NYSE/JNJ).

The first-quarter earnings and guidance will help drive trading over the next month.

The market is clearly seeing some encouraging news in the housing market and economy. The concern continues to be the distressed jobs market, where unemployment is at 8.5%. In the auto sector, there is speculation that General Motors Corporation (NYSE/GM) will seek bankruptcy protection by June 1. We feel GM will seek bankruptcy to deal with its losses and restructure. The government will not lend GM additional funds unless there is a viable plan in place. Bankruptcy will probably mean a revamp of the current product line, including fewer models. We also expect to see major job cuts.

Until we see a halt to the job losses in both the public and private sectors, there will be questionable consumer confidence and the willingness to spend money.

The key will be to buy on dips and sell into strong rallies. Make sure you have some cash around to take advantage of some buying opportunities that will surface. In this market, you've got to take some risk in order to make money. Just sitting on cash does not make sense.

Profit Confidential

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